As a tax professor, I love taxes: the theory, the policy, even the politics. But I have a confession to make. I hate doing them. My taxes are not complicated. Yet, every year, I spend hour upon hour gathering documents, paying for tax preparation software, entering in my income, and puzzling through the instructions as I try to figure out whether I am eligible for this or that deduction or credit. Every year, I think to myself: There has got to be a better way!
And there could be, so long as politicians got out of the way and let the IRS work directly with the American people. By that, I’m referring to a 2024 pilot program that would allow a large number of taxpayers to file directly with the IRS. It’s a huge deal! But like most things associated with taxes, it is complicated.
Those of us of a certain age remember receiving a thick booklet from the IRS each year filled with forms and instructions. If you needed a rare form not included in the booklet, you had to go down to the post office to see whether they had one. For those who didn’t get to experience this joy, all I can say is: Be skeptical of those promoting the good old days. Some things may be simply too painful to remember.
With the rise of the personal computer, companies like Intuit developed tax preparation software to help people do their own taxes, saving them the need to hire an accountant. The computer would walk you through all the steps, but you still had to print out the returns and mail them in. Don’t forget to attach your W-2 and 1099-Rs! The parties at the post office, as the deadline approached, were epic.
Eventually, as technology advanced, Congress and the IRS figured out that “e-filing” was the future. The information contained in a paper return could be squirted over a modem as a series of 0’s and 1’s, obviating the need to kill trees and race to the post office. The IRS would no longer have to receive and process millions of physical returns. It was a true win-win. But how to get people to file electronically? This is where it gets interesting.
Simply put, the IRS wasn’t up to the task of developing its own free online system, so it joined forces with commercial tax preparation software companies to create a free filing option for those with income under a certain amount (in 2022, $73,000). In return for the companies agreeing to provide free filing for around 60 percent of all taxpayers, the IRS agreed not to develop its own product. The program has been modified over the years, but it is currently on its last legs. Even at its peak in 2005, only 6.4 percent of eligible taxpayers took advantage of the program. Over the past few years, Intuit and H&R Block, which handled 70 percent of the free-filing volume, have withdrawn from it entirely. Suffice it to say, this effort has failed.
We won’t discuss the issues with tax preparation companies diverting customers who could have filed for free to fee-paying services, except to say that such abuses led to changes in the program that now allow the IRS to develop its own direct-file program. The Inflation Reduction Act, passed in 2022, included funds for the IRS to study the question, and the IRS issued a long-awaited report in May. The report determined that taxpayers are interested in an IRS-developed filing option, but it acknowledged uncertainties regarding the costs and how many people would actually decide to use it.
The net result is a pilot project for the 2024 filing season (the 2023 tax year) that will be rolling out in 12 states, eight of which have no state income tax (Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming) and four of which do (Arizona, California, Massachusetts, and New York). Not everyone in those states will be eligible to participate in the pilot, but the IRS estimates that up to 20 million taxpayers are eligible. The ultimate goal would be expand the number of eligible taxpayers and to integrate federal and state filing into a simple, one-stop website.
It should come as no surprise that tax prep companies view this as a threat to their business model. Nor should it surprise anyone that they are taking steps to undermine the effort, ranging from deploying lobbyists in D.C. to insinuating through well-placed op-eds that a government-sponsored direct-file option will hurt the very people it was designed to help, particularly in diverse communities. I would not be surprised to discover that the tax prep companies were behind recent Republican efforts to cut IRS funding.
Doing your taxes will never be fun, but it could be cheaper and easier. If you live in one of the states participating in the pilot, I encourage you to check out the direct-file option to see whether you can participate. If the tax prep companies can build a better mousetrap that people are willing to pay for, God bless them. But we have an opportunity to help government work better for all of us. Let’s not pass it up.
